Saradha-hit govt plans ordinance teeth for Sebi


Stung by the Saradha episode, the government has decided to drastically amend legislation governing the market regulator's power to police chit fund companies. The finance ministry will push for the legislation to be cleared in the current session of Parliament and, if that fails, to issue an ordinance immediately afterward.

Government managers believe the explosion of Ponzi schemes in West Bengal and in Uttar Pradesh is enough of a public emergency to justify the passage of an ordinance, if Parliament is unable to legislate on it.

The new law will give the Securities and Exchange Board of India the power to regulate all chit funds, nidhis, non-banking financial companies and cooperatives — whether listed or not — if they raise money from the public in any manner. All these entities will be brought under the definition of collective investment schemes. The current SEBI Act, 1992, specifically keeps them out of Section 11AA, which defines a collective investment scheme.

The proposed changes are broadly in line with a proposal the regulator sent to the finance ministry last June when Pranab Mukherjee was finance minister. SEBI suggested that a single regulator should be set up to police money circulation schemes launched by companies, irrespective of the sector they belong to.

Two sets of proposals, short term and long term, were debated by the Financial Stability and Development Council, the highest policy coordination body of financial regulators, but were not acted upon. This was despite the fact that SEBI had been having run-ins with Ponzi schemes including Saradha for over a year by then. The Sahara case came up in the Supreme Court soon thereafter.

The government has now accepted that the only way to keep a real-time check on the activities of companies like Saradha — and a host of others also under investigation — is to have a single regulator. However, instead of creating a new regulator, SEBI will be given additional powers to do the job.

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